It is beyond any doubt that the craze of smartphones and tablets has gripped almost every part of the globe. This uptrend has benefitted several sectors including the global consumer motion sensor industry. Motion sensor technology has been enjoying considerable demand in light of heavy demand for smartphones, and more manufacturers are jumping in to create power-packed phones. InvenSense (INVN, Financial) is one of the leading companies in the motion interface market that develops and markets micro-electro-mechanical systems (MEMS) for various consumer electronic devices.
Apple: The sweet bite
Though Apple (AAPL, Financial) has been a long-standing client of InvenSense, teardowns of the iPhone 6 and iPhone 6 Plus have revealed that the rumors surrounding the company’s participation are true. As per media, the company has won the accelerometer/gyroscope socket in the new Apple designs. Already, there were rumors that InvenSense would show up in the teardowns, but people were still not highly confident about the same because of disappointment in the previous year. However, now that the news is confirmed, investors can heave a sigh of relief and expect a big revenue check to come in as Apple has already sold more than 10 million iPhones in its weekend launch.
Before we proceed further to discuss how this win would impact the company’s revenue, let us take a few moments to understand the context behind this story. InvenSense builds microelectromechanical systems (MEMS), sensors with moving parts so small they can be seen only through a microscope. The components tell your smartphone or tablet if it’s being tilted, twisted, shaken, turned left or right, and how fast. Now, it already has well-placed contracts with top Android vendors including Samsung, HTC, LG, and Acer. However, analysts and investors had predicted that the company would get business from Apple for the new iPhone and had also revamped its production capacity to meet the new requirements.
Hoping that the context behind the InvenSense and Apple saga is clear to you, it is now important to understand its probable revenue impact. For the fiscal year 2015 ending in March, analysts expect InvenSense to generate $367 million. Management had previously guided FY 2015 revenue of $315-341 million without any additional design wins like Apple. That means that analysts are factoring in at most $50 million worth of Apple design sales over the next six months. Now, assuming that launch sales for the iPhone 6 and iPhone 6 Plus are the same percentage of total sales that the iPhone 5s and iPhone 5c represented for the September quarter last year, it would mean sales of around 37.5 million units for this quarter. Therefore, according to my rationale, it would not be unfair to assume a number higher than $50 million in revenue impact.
Even when I assume that InvenSense will make just $2 on each iPhone sold (based on data for its 6-axis Gyro pricing) then it pushes the revenue impact to around $75 million. And, it should not be forgotten that the phone has not yet launched in China, which is one of the world’s biggest smartphone market. Hence, if we were to include China as well in the calculation, then the figure would jump even further.
China: The goldmine of opportunities
Since I have brought China to the discussion, it is only prudent to talk about it at length and analyze the impact of this phenomenally growing economy on InvenSense. As per a Consumer Market Research Report, it is estimated that the smartphone market in China will grow at a CAGR of 5% during the period from 2013-2018. This increase is due to the successful presence of international as well as local smartphone vendors such as Apple (AAPL, Financial),Samsung, Huawei, Xiaomi, Lenovo, ZTE and several others. As a result of the increase in number of vendors along with an improving economy, China has become a lucrative playing field for tech giants. Amidst other technologies, the motion sensing technology is also set to boom in the region during the next five years.
As per another research report, the motion sensing technology is poised to grow at a CAGR of approximately 21.7% till 2016 and InvenSense has a strong alliance with Chinese smartphone vendors like Xiaomi, Oppo, ZTE, and Lenovo, to adequately leverage this massive opportunity. Consider this, Xiaomi, the new rage in China, added a whopping 10% to InvenSense’s revenue in the first fiscal of 2015. Therefore, it is clear that the booming phase for smartphones in the Chinese markets is a boon to InvenSense, and the company has rightly designed products to offer to the low-cost phone manufacturers thereby making it a win-win situation.
Takeaway
Before taking any investment decision related to InvenSense, investors need to bear in mind that the company belongs to a growth-oriented industry with many opportunities. The total addressable market of motion sensors is expected to grow to $2.56 billion by 2016, which currently stands at $1.97 billion. The microphone market will grow to $4.2 billion at a CAGR of 21% and MEMS navigation and environment sensing market and MEMS sound quality market will grow at a CAGR of 23% and 12%, respectively. These numbers highlight that a significant market exists for InvenSense’s products and though it is a bit overvalued, the stock is a justified buy.
